Providing your own benefits

Today’s Get Rich Slowly post on saving money on insurance got me thinking about benefits in general. This is one of the most common questions I hear from beginning or aspiring freelancers: how to handle health insurance/retirement planning/disability insurance, and so on. Here’s an overview of the freelance benefits I’ve researched and used; obviously the specifics vary according to your location, and these apply mostly to freelancers working in the U.S. Also, obviously I’m not an insurance consultant or a financial planner, so please follow this advice up with a professional before you implement it.

First, accept that when you’re a freelancer, benefits eat up a lot of what you earn. I think that this is yet another argument for charging real money for your services; it’s easy to think that 500 words an hour at 10 cents a word translates (so to speak) into $50 an hour in your pocket. However, once you deduct self-employment tax, health insurance, retirement contributions and unpaid vacation, you could be netting up to 40% less than you would if you worked for an employer. If you carry other coverage such as disability, dental, life or professional liability insurance, you’re probably looking at 50% of your gross income going to benefits.

Second, look at the types of benefits you really need or want in light of your life situation and don’t always follow the conventional wisdom. For example, the Thoughts on Translation household doesn’t carry life insurance even though we’re in the demographic that should carry it (30s/40s with a young child) because we are completely debt-free, our living expenses are low and we have only one child to send to college. In our case, I feel we’re better off putting the money we’d spend on life insurance premiums into a savings account. But if you’re a single parent and your children would need to be supported into adulthood if you passed away,  you might need a hefty life insurance policy in place.

Now on to some specifics:

• Health insurance is the elephant in the room if you live in the U.S. If you’re healthy, have no pre-existing conditions and have some savings to cover deductibles and out of pocket expenses, you can get a decent policy at a decent cost. For example, we pay under $500 per month for a Blue Cross/Blue Shield policy for our family of three, with a $2,000 per person/$5,000 maximum per year deductible. In our area, Kaiser and Anthem both offer reasonably-priced individual policies for the self-employed. The real headaches start if you have a pre-existing condition or even a past health problem that you have to disclose on the insurance application. Rumor among Colorado-based freelancers has it that you’re best off using an insurance broker, since the broker can help you fill out your application in a way that gives you the best chance of being accepted. This seems especially true if you had a health problem in the past that is now considered resolved or under control, for example if you were diagnosed with high blood pressure but it is well controlled with medication. Also, some States give you the option of forming what’s called a group of one, meaning that you get a group rate on health insurance even though you’re only one person. Here’s a CNN article about ways to obtain health coverage if you have pre-existing conditions.
• Saving for retirement is a little less anxiety-provoking. It’s not hard to set up a SEP-IRA (Simplified Employee Pension Individual Retirement Account), Roth IRA or an Individual 401K (also called a Solo 401K or Super-Simplified 401K). These types of accounts offer similar features, but most people can contribute much more to an Individual 401K than to the other types of accounts because the base contribution limit is a flat amount rather than a percentage of your income. This may not be a factor if you only contribute a few thousand dollars a year, but if you want the option to contribute more, check out the Individual 401K. When you’re planning for retirement, consider what type of retirement you envision. Since translation is not physically demanding (and your clients don’t necessarily have to know how old you are!), many of us might work into our 70s and even later. But if you’re planning on logging off at 55 or 60 and hitting the country club, you may need enough money to support yourself for 30-40 years. Here again, I would recommend looking at your own reality rather than the conventional wisdom.
• Then there’s vacation time and the fact that as a freelancer, if you’re not tapping the keyboard you’re not getting paid. You have a few options, such as taking “paid vacation” by working while you’re away. For example you could bring your laptop along and still try to work a few hours a day. I try not to do this because I like to get a real break from work, but it’s certainly better than not going on vacation at all. I think that a better option is to provide yourself with paid vacation by setting up a vacation savings account out of which you pay yourself during your time off. For example if you normally pay yourself $1,000 a week net and you want to take 4 weeks off per year, you could put $83 per week ($4,000 divided by the 48 weeks you’re working) into savings and then use that money to pay yourself during your month off. Unfortunately, I think that most freelancers just don’t take any or enough vacation, to to detriment of their non-work lives and enthusiasm for their jobs.
• I don’t know much about disability insurance, but I would put it in the same category as life insurance: somewhere between indispensable and totally unnecessary depending on your circumstances. My impression is that it’s important to carefully review the policy to see what you have to do to actually claim the benefits. For example if you break your arm in a bike accident and can’t type, is that covered or excluded? If you can’t type but you can use speech recognition software, is that covered? If you develop an eye problem that makes it hard or impossible to use the computer, is that covered? I’ve heard several freelancers say that they decided to forgo disability insurance after concluding that an affordable policy is too restrictive, but this is worth researching if you’re concerned about it.

In conclusion, make sure to set aside some time and money for little bonuses. You know how a great boss comes up with great motivations or rewards for her/his employees? Like closing an hour early on a Friday when the weather’s nice, surprising everyone with good takeout for lunch, leaving $50 in everyone’s mailbox on the day before winter vacation or buying season tickets to a great concert series and distributing among the employees? Make sure to do those things for yourself once in a while too! Remember that benefits are intended to benefit you and make your life less stressful.